QUESTION: Several years ago, our company established an HRA for employees who elect the high-deductible health coverage option under our medical plan. The HRA is unfunded, and each participating employee receives a credit of $1,000 per year, with unrestricted carryovers. Some employees now have sizable balances. Can they earn interest on their HRA balances?
ANSWER: Yes, but not by making actual investments, unless a trust is established to fund the HRA. When an HRA is maintained on an unfunded basis, credits under the HRA represent bookkeeping entries rather than actual, separate assets, and reimbursements are paid out of the employer’s general assets. Because no separate assets are involved, HRA balances under an unfunded plan will not earn interest in the way that, for example, a savings account earns interest. If the employer wishes, however, it can periodically credit additional amounts to participants’ bookkeeping accounts in an amount equivalent to the interest that they would have earned if their HRA balances had been held in an interest-bearing investment. Like other amounts credited under an HRA, these “notional” credits would not be taxable, they could be used only to reimburse qualifying medical expenses, and they would be subject to the Code’s rules prohibiting discrimination in favor of highly compensated individuals.
As HRAs mature, long-term participants may accumulate substantial HRA balances if there is a carryover feature. This can lead some employers to decide to fund their HRAs through a trust, e.g., using a VEBA. (Funding might be attractive if the HRA carryovers represent a substantial liability on the employer’s balance sheet.) If an HRA were funded, the employer could deposit funds equal to the HRA credits into the trust to be held in an interest-bearing account, with interest allocated to participants’ HRA accounts based on their HRA balances. Note that funded HRAs are subject to additional requirements. For example, the trust assets would need to be invested prudently under ERISA’s fiduciary standards, earnings that are not credited to participants’ accounts could be used only to defray plan administration expenses or to provide benefits to participants, forfeitures attributable to terminated employees would have to remain in the trust, and additional reporting requirements would apply.
You should carefully consider your strategy for communicating this benefit to participants, including the ability to amend or discontinue interest-crediting in the future.
For more information, see EBIA’s Consumer-Driven Health Care manual at Sections XXI.F.5 (“Funded or Unfunded HRA?”), XXI.F.6 (“Interest on HRA Balances?”), and XXV.D (“HRAs and ERISA”). See also EBIA’s ERISA Compliance manual at Section XIV (“How Plans Pay Benefits: Funded Versus Unfunded Plans and Plan Assets”) and EBIA’s Self-Insured Health Plans manual at Section XIX (“VEBAs and Other Trusts”).
Contributing Editors: EBIA Staff.